An insider’s view of problem loans

What’s the best way to kick-start lending and a broader economic recovery? Take care of the existing bad loans, in the view of Mark King, an attorney who focuses on distressed real estate assets, management and workouts.

“Until the distressed assets on the commercial side get worked out, you’re not going to have meaningful new commercial lending,” said King, a director at Rialto Capital Advisors LLC, a Miami firm that manages and resolves problem loans. The company is handling loan portfolios from 23 failed banks — a total of about 5,500 loans and $3 billion in assets.

“Just because a bank fails doesn’t mean the debt [owed by borrowers] goes away,” said King. “Sooner or later you’re going to hear from a company like Rialto, who you don’t want to deal with.”

The company takes a hard line with debtors. King shared some of its tactics with bankers who handle special assets and others from the financial, real estate and investment industries during a meeting of the Tampa Bay chapter of the National Funding Association Inc.

In a take-off on David Letterman’s Top 10 lists — “Only I have half as many on the list and it takes twice as long to talk about them” — King discussed the Top Five mistakes that special assets officers make.

No. 1: Failing to read and understand everything in the problem loan file that lands on the special asset manager’s desk before approaching borrowers. He urged the managers to especially look for what the borrowers are complaining about and “what they think they have on you.”

No. 2: Failing to understand that loan agreements contain both rights and obligations. Debtors are required to pay back the money they borrow, but lenders also have funding obligations under those agreements. If a debtor can point out a lender didn’t live up to its obligation, a judge is more likely to give credence to that in court.

No. 3: Handing off too much responsibility for the case to a professional, such as a lawyer, who is paid by the hour and doesn’t have as strong an incentive to get a resolution on the case.

No. 4: Failing to understand the remedies for bad loans, especially in Florida, with its unique laws on homesteading, wage garnishment and foreclosures.

And No. 5 on the list (“Drum roll please.”): Putting too much trust in debtors. King advised the professionals not to allow debtors to delay a case, not to assume debtors will do anything they’ve promised to do and to fully understand the remedies if a debtor breaches an agreement.

“What you have to understand about debtors is that they’ve already walked away from the deal in their own minds,” he said. “They won’t honor their obligations, be they contractual or statutory or judicial.”